Do groups make wise judgments? James Surowiecki, author of The Wisdom of Crowds, suggests that under the right circumstances a group of people can be smarter than the smartest single group member. By successfully tapping the knowledge of a large group, we can improve our decisions.
Video
We can even improve our predictions about the future. At the turn of the last century, Francis Galton averaged fair-goers’ estimates of the weight of an ox and found the average was just one pound less than the actual weight. Taking a similar problem to Times Square, Surowiecki and the narrator ask passersby to judge the number of jellybeans in a large jar. Surowiecki argues that the crowd will be much smarter than the average person. At the horse races, playing the odds usually pays off. The odds on the horses are set purely by the crowd. Every single person who bets affects the outcome. Similarly, in buying stocks, people are offering their best judgment on what a stock is worth. It is very hard for even the smartest money managers to do better than the stock market as a whole. This explains why index funds with holdings from an entire sector of the market beat managed funds where the experts select stocks.
But crowds can go wrong, admits Surowiecki, when diversity breaks down or when people pay too much attention to what those immediately around them are doing. The Internet site NewsFutures, now called Hypermind, enables anyone to bet on the likelihood of almost any specific future event. The crowd’s predictions prove accurate. Corporations use the Internet site for information on how to market their goods because it taps directly into the collective intelligence of the audience. Similarly, the crowd’s judgment of the success of future movies and even of likely Oscar winners is typically better than that of the experts. The actual number of jellybeans in the jar was 1369. The crowd’s average guess was 1247. No single guess was closer.